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HEDGE-TO-ARRIVE Contract
FEATURES
* Shipment at a Later Date
* Futures Market Portion Priced Immediately
* Basis Priced at a Later Date Using the Then Current Basis
* Payment Received at a Later Date
DEFINITION
The hedge-to-arrive marketing alternative is one which offers the seller of grain the ability to lock-in the futures market portion of the pricing on a cash grain contract. The basis portion of the cash grain contract will be completed at a later date per contract specifications. This alternative is thus suitable for the seller of grain who feels that futures market prices will fall. This alternative provides for future delivery of the physical grain inventories. In essence, the hedge-to-arrive marketing alternative is the opposite of a basis-fixed contract.
The hedge-to-arrive contract requires the future delivery of the physical commodity. If the delivery of the physical commodity is not required in the contract than the contract is considered an illegal off-exchange futures contract and the contract participants could be subject to Federal prosecution.
ADVANTAGES
* Allows the seller the ability to lock-in what he/she perceives to be favorable futures market prices.
* Provides time during which the seller can price the basis portion of the contract. If the seller of grain feels the basis market will improve, this alternative provides the seller the ability to price the basis portion of the contract at a later date.
* Allows the seller the ability to lock-in favorable futures market carrying charges when available.
DISADVANTAGES
* Does not allow the seller to benefit if the futures market rallies after the futures market portion of the contract is priced.
* Locks the seller into a specific delivery point. Does not allow the seller the ability to arbitrage grain to the best market upon delivery.
* Does not lock-in the basis portion of the trade. The seller may be exposed to a potential basis decline
* May expose the seller to quality deterioration if the seller has to store grain until a later delivery date.
* May expose the seller of grain to additional storage costs if the seller has to inventory grain until the contract shipment period.
EXAMPLE
On June 15th, the posted bid for March delivery corn is $1.95 per bushel and the March futures level is $2.40. This is a basis level of 45 cents under the March. You like the futures level, but think the basis is historically wide and will narrow before you plan to deliver. You enter a Hedge-To-Arrive contract with FREMAR, locking in the $2.40 March futures level.
On January 15th, the March futures have dropped to $2.05 per bushel and the cash bid is $1.70, a basis of 35 cents under the March futures. This is an acceptable basis level to you, so you instruct FREMAR to set the basis on your HTA contract. You have a price of $2.05 per bushel for your corn.
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